Brazil oil auction to gauge investor appetite amid reforms

RIO DE JANEIRO (Reuters) - Brazil’s oil auction this week will test whether a raft of market-friendly reforms under President Michel Temer can tempt investors back to a sector tarnished by a corruption scandal at state-controlled oil firm Petróleo Brasileiro SA.

Tanks of Brazil's state-run Petrobras oil company are seen behind the Brazilian national flag in Brasilia, Brazil, August 31, 2017. REUTERS/Ueslei Marcelino

Brazil will auction 287 onshore and offshore exploration blocks on Wednesday, raking in at least 1.69 billion reais ($537 million) if all are assigned.

Wednesday’s auction is Brazil’s fourteenth round for blocks outside of the coveted pre-salt area and should gauge appetite for the country’s second and third pre-salt rounds next month.

Thirty-two companies will vie for the blocks this weeks, including Royal Dutch Shell Plc, BP Plc, Exxon Mobil Corp, Repsol, Total SA, Rosneft, CNOOC and Brazil’s state oil firm, known as Petrobras.

The auction will be Brazil’s first since a failed round in December 2015, when oil regulator ANP sold only 37 of 266 blocks on offer, as tough local content rules under former President Dilma Rousseff discouraged investment from major foreign firms.

Rousseff and her leftist Workers Party saw Brazil’s oil reserves as an opportunity to develop domestic shipbuilding and oil services firms, which were at the heart of a political bribery probe jailing dozens of politicians and executives.

Temer has rolled back many of his predecessor’s nationalist policies in an effort to attract more foreign investment, while new management at Petrobras is striving to clean up its contracting process.

“The oil sector is one of the clearest examples of this attempt to turn the corner on the recent past of state intervention,” said João Augusto de Castro Neves, Latin America director at Eurasia Group. “It is the beginning of a very promising cycle of bid rounds and investments in Brazil.”

Corruption charges against Temer have slowed but not stopped his free-market reforms, which boosted the benchmark Bovespa stock index to an all-time high this month.

The government has defined an ambitious calendar of 10 bidding rounds through 2019, giving companies a longer horizon for planning as they prepare bids.

Brazil also extended by two decades a preferential customs regime for the oil and gas industry called Repetro, encouraging long-term investments.

A lingering complaint from the industry is the drawn-out environmental licensing process that means many winners in the 2015 bidding round have still not started drilling.

Last month, Brazil’s environmental regulator Ibama rejected Total’s study for drilling in the Foz do Amazonas basin, threatening to suspend the license application.